Can’t Pay VAT? What Happens and What Directors Should Do

If you cannot pay your VAT bill, the situation is more common, and more fixable, than it feels right now. We talk to directors in exactly this position every week: the bill sat there for a month, then two, then a penalty notice arrived, and now a firmer letter has landed. What you do in the next few days matters more than how you got here.

Handled early, unpaid VAT can often be dealt with through a payment plan, provided the company is viable and the repayments are affordable. Left alone, it escalates: HMRC may agree a plan if you contact them before they start enforcing, but their willingness to deal narrows sharply once they do. Below, we set out what happens, what it means, and what to do now.

Can’t Pay VAT? Quick Answer

If you cannot pay your VAT, file the return anyway and contact HMRC before enforcement starts. Most viable companies clear VAT arrears through a Time to Pay arrangement, an instalment plan HMRC agrees where the business can sustain the repayments. If the company cannot pay its VAT or its other debts as they fall due, that is an insolvency question, and it is worth taking advice.

What Directors Should Do First If You Cannot Pay VAT

A handful of actions in the first few days do most of the work. They cost nothing, and in our experience they are what separate a payment plan from a court petition.

1. File the VAT return on time. Late filing and late payment are penalised separately, so a filed return you cannot pay is far better than filing nothing.
2. Check the actual amount due. Confirm the figure, and any adjustments or corrections, before you negotiate anything.
3. Work out what the company can afford. Set a realistic monthly figure from your cash flow over the next quarter, not just today’s bank balance.
4. Contact HMRC before enforcement starts. Phone the Business Payment Support Service on 0300 200 3835. Early contact keeps every option open.
5. Keep records of cash flow and decisions. If the company’s solvency is later questioned, notes made at the time protect you.
6. Do not promise payments the company cannot make. A broken arrangement is harder to renegotiate than an honest, smaller one.

Can You Get a VAT Time to Pay Arrangement?

A Time to Pay arrangement is HMRC’s formal instalment plan for tax it is owed. In plain terms, you pay the VAT off in monthly chunks instead of one lump. For most directors it is the single most effective tool available, and worth pursuing before any formal insolvency route.

Setting up a plan online. Some companies can set up a VAT payment plan online without calling HMRC.

Eligibility depends on HMRC’s current conditions, which generally require that you have filed your outstanding VAT returns, owe no more than the self-serve limit, are within a set window of the payment deadline, have no other HMRC payment plans or debts, and can clear the balance within the maximum term.

Check the current thresholds on the VAT payment plan service before relying on them, because they change. Above those limits, or once enforcement has started, you arrange Time to Pay by contacting HMRC directly through the Business Payment Support Service on 0300 200 3835.

What HMRC will ask for. Have these ready before you call. HMRC respond far better to a specific, sustainable proposal than to a request for unspecified patience.

• the VAT amount owed;
• why the company cannot pay;
• what the company can afford each month;
• current and forecast cash flow;
• any other tax debts;
• whether future VAT returns can be paid on time.

HMRC also expects you to reduce the debt as far as you reasonably can first, for example by releasing assets such as stock or vehicles, and it may ask directors to put in personal funds or arrange lending before it agrees a plan. Go in expecting that conversation.

Acceptance is far more likely if you are up to date on PAYE, Corporation Tax, and current VAT returns. Behind on everything at once, and a plan is much harder to win.

A specific, affordable offer lands far better with HMRC than a vague request for more time, and putting one together is something we help directors with every week.

One thing we always flag: a plan can wrap up the VAT, penalties and interest together, and it can reduce or remove the penalties, but interest keeps running on the unpaid balance until it clears. Miss a payment and HMRC can cancel the arrangement and charge the penalties as if it had never existed, so only agree to what you can genuinely keep to.

If Time to Pay is refused. HMRC can decline a plan, or agree one and then cancel it if you miss an instalment or fall behind on a current return. If that happens, they may press for faster payment or move to recovery action.

A refusal also reframes the question. The directors we help who get a flat no are usually looking at a solvency problem rather than a timing one. That is the point to take advice, not to make a second offer you cannot keep.

VAT Penalties and Interest If You Pay Late

Late VAT carries two separate charges: a late payment penalty and late payment interest. The penalty is banded by how late you are, and a Time to Pay request made in time can stop it rising or prevent it altogether. Interest runs from the first overdue day regardless.

Up to 15 days late. There is no late payment penalty if you pay the VAT, or agree a Time to Pay arrangement, within 15 days of the due date. Late payment interest still applies from the first day the payment is overdue.

16 to 30 days late. From day 16 a first late payment penalty applies, calculated at 3% of the VAT still owed at day 15. Requesting Time to Pay within this window can stop the penalty rising further.

31 days or more late. If the VAT is still unpaid after day 30, the first penalty rises to 6% in total: 3% of the balance owed at day 15 plus 3% of the balance owed at day 30. From day 31 a second penalty then builds up daily, at an annual rate of 10% on whatever remains outstanding, until the debt is cleared. HMRC enforcement risk becomes serious at this stage.

The exact penalty and interest rates are set by HMRC and change over time. Interest is charged at the Bank of England base rate plus 4% per year. Confirm the current figures on GOV.UK before you rely on them.

A quick example. Say a company owes £20,000 in VAT and pays 40 days late. Nothing is charged for the first 15 days. At day 15 a first penalty of 3% (£600) applies, and as it is still unpaid at day 30 another 3% (£600) is added: £1,200 in penalties.

From day 31 a second penalty starts building daily at 10% a year on what is left, and interest has been running on the £20,000 since day one. We show directors this maths for one reason: paying sooner shrinks all three charges at once.

What Happens If You Still Do Not Pay VAT?

If nothing is in place, HMRC’s response follows a predictable path, and we see the same sequence play out again and again. The table below is what it looks like in practice, and where each stage sits on the risk scale.

The trigger for a winding-up petition is rarely the size of the debt. It is HMRC’s read on whether you intend to pay voluntarily. VAT arrears, like PAYE, signal that you may already have crossed that line. If a statutory demand arrives, treat it as a deadline, not a warning, and take advice the same week.

Can Unpaid VAT Lead to Insolvency?

In our experience, unpaid VAT is often the first hard evidence that a company is insolvent, and HMRC treat it that way. The money was never really yours: you collected it from your customers to pass on. Owing it is a different kind of signal from owing a supplier.

If the company cannot pay its debts as they fall due, including VAT, it meets the cash-flow test for insolvency. VAT debt rarely stands alone, and usually sits alongside PAYE, Corporation Tax, supplier arrears or loan arrears.

Since December 2020, VAT is a secondary preferential debt, which means HMRC gets paid ahead of banks holding a floating charge and ahead of ordinary unsecured creditors in the order creditors get paid.

HMRC now recover more from a liquidation than they used to, so they are less patient and quicker to petition. Where there is no realistic route to catch up, that is the point to take formal insolvency advice.

What Directors Risk When VAT Is Unpaid

First, the reassuring part: limited-company VAT is normally a company debt, not a personal one. Director conduct only becomes relevant where the company is insolvent, or close to it, and the exposure then usually comes through wrongful trading rather than a personal VAT bill.

HMRC can issue a personal liability notice for VAT, but that is reserved for deliberate default or evasion, not for a company that simply ran short of cash.

Most of the damage we see was not caused by the original bill. It was caused by what the director did, or failed to do, in the weeks after it.

• Continuing to trade when the company cannot pay its debts. If the VAT debt grows while the company is insolvent, a liquidator can seek a personal contribution under section 214. See what happens to directors in liquidation.
• Paying some creditors while ignoring HMRC. Preferring other creditors once insolvency is likely can be unwound and counted against you.
• Using VAT money to fund ongoing losses. Spending VAT you have collected to prop up a loss-making company deepens both the debt and the exposure.
• Making unrealistic promises to HMRC. A plan you breach is worse than a smaller one you honour, because a broken arrangement is harder to renegotiate.
• Failing to keep proper board or cash-flow records. Without notes made at the time, it is harder to show your decisions were reasonable.
• Taking dividends or repayments when the company is insolvent. Dividends drawn from a company that cannot pay its debts can be reclaimed, and directors’ loans called in.

These matter beyond the debt itself. This is also where director disqualification can start: the Insolvency Service looks at conduct like trading on when the company cannot pay, failing to keep proper records, not paying tax that is owed, or taking company money for personal use. Clean records and early engagement are what keep you on the right side of that line.

Options If the Company Still Cannot Pay VAT

If a standard Time to Pay arrangement is not enough on its own, a few routes remain. Which one fits depends on whether the business is fundamentally viable, and that is the first thing we look at with you.

The practitioners we work with deal with HMRC VAT debts every day, and a free, confidential conversation will clarify your position before HMRC forces it. Where a rescue is still possible, the earlier you talk to us, the more options remain open.

Frequently Asked Questions